Review your current asset mix

Hey there, time traveller!This article was published 3/1/2013 (1435 days ago), so information in it may no longer be current.

We did not fall off the "fiscal cliff" this week. That made for a much happier start to the new year than if U.S. politicians had proven they were incapable of any form of compromise.

So now, what?

CHARLES DHARAPAK / THE ASSOCIATED PRESS

U.S. President Barack Obama winks as he arrives to make a statement regarding the passage of the 'fiscal-cliff' bill.

The first thing to happen is a relief rally on the stock markets, as we have seen since enough U.S. Congressmen chose the greater good and common sense over their narrow ideologies and passed compromise legislation Jan. 1 to avert a series of automatic spending cuts and tax increases. It was feared these would push the U.S. economy over a "fiscal cliff" and send it into recession in 2013.

Rather than talk about the poor press coverage and the politicians, let's first look at what you should be doing right now in your own situation, given these circumstances.

The Canadian stock markets are at their highest level since last February and the U.S. markets are near the multi-year high they set two months ago.

Many investors take such facts to either mean:

1. This is the start of a big rally, and I should put all my money in stocks; or,

2. Stocks are high, so I should sell all.

Many other investors will do nothing, leaving their asset mix as is and they will be closer to doing the right thing. However, I think this rally is a great opportunity for you to review your current asset mix and make any changes necessary to bring it back to your long-term target.

When the markets have risen is the best time to do a self-test on your asset mix and consider making adjustments back to your target. This time is best, as it allows you to reduce stock holdings -- if that is the right thing for your situation -- while likely taking profits.

It is much more painful to rebalance to your target mix after a stock-market crash, which is when most people choose to reassess their personal risk tolerance.

Oh, you don't have a long-term target? Well you should.

The first step in the investment-planning process is to determine your ideal, or target, asset mix, and write down your investment policy. This should at least state the target percentage of your overall portfolio to be in:

1. Cash and near cash assets;

2. Fixed income (bonds; GICs);

3. Equities (stocks, trust units).

Ideally, you have these categories broken down further, but let's start with this. Your percentage in each category should be based on your situation. The key factors are your time horizon for this portfolio, your current or expected need for liquidity, your need for income and your personal risk tolerance.

Your investment adviser or several good websites can provide you with a questionnaire that will help you determine your target asset mix. This is very important as you want an optimal mix that can provide the maximum return for your constraints of time and risk tolerance.

It's also important to put aside in liquid investments any amounts you may have to withdraw from the portfolio in the next two years. You don't want any such amounts to be in investments that can fluctuate wildly, such as equity holdings.

Remember, Dave's Rule No. 1 of investing is to always avoid putting yourself into a situation where you may be forced to sell low.

The politicians have given us an opportunity to set those amounts aside while stock prices are good, so take advantage, if your situation requires that.

You can count on those same U.S. politicians doing some dumb things going forward that will shock the markets. The next critical vote needed in the U.S. is to raise the debt ceiling and borrowing limits. That's the one that should really be called the "cliff." The so-called fiscal cliff was, at worst, going to be a slippery slope, with many opportunities to turn off.

If Congress decides to make this debt-ceiling vote a battleground for ideology and an opportunity for grandstanding, as it did in 2011, things will get very rocky again.

Either way, I wish all the best to you and yours in 2013.

David Christianson, BA, CFP, R.F.P., TEP, is a financial planner in Winnipeg and author of Managing the Bull, A No-Nonsense Guide to Personal Finance.

History

Updated on Friday, January 4, 2013 at 8:53 AM CST: Byline corrected

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